Poultry farmers putting up new buildings may be missing a trick when it comes to claiming for tax breaks. Tax expert Peter Griffiths explains.
With poultry processors expanding to meet the increasing demand for chicken, producers are engaged in something of a growth spurt, with new buildings going up across the country.
While it is generally understood that Agricultural Buildings Allowances are no longer available – eliminating the ability to obtain tax relief against income for the cost of the building – there are other opportunities to claim relief.
Much of the expenditure on items that form part of the building will qualify for tax relief against income, as it will be in respect of items eligible for capital allowances.
These items, known as “integral features”, include things like ventilation, lighting, electrical systems, heating and water systems. They effectively form part of the building, and will need to be clearly identified to ensure that the available tax relief is maximised.
It is possible that the contractor putting up the building will also be installing these items. It is therefore essential that any invoices received separately identify the cost of the “shell” of the building, and these other items, which should then be eligible for capital allowances.
Planning costs and professional fees may also form a substantial part of the overall cost of the unit – sums of £30,000-£60,000 are quite common. Where these costs relate to both the shell of the building and to the integral features, then capital allowances can be claimed on a proportion.
As an example, planning and professional fees might total £50,000, while the construction cost of the building is put at £1m. It is also calculated that 40% of the construction cost relates to integral features. In this case, £20,000 (ie £50,000 x 40%) of the planning costs and professional fees should also be eligible for capital allowances.
Tax relief will also be available for equipment such as feeding systems that are not part of the building and can be moved between different units. Normally this will not be provided by the contractor who constructs the building, so separate invoices will need to be received from the relevant supplier. It will then be easier to identify what tax relief is available for such expenditure.
The date that expenditure is incurred can affect the timing of available tax relief, but not the total tax relief available.
The current Annual Investment Allowance (AIA) for expenditure eligible for capital allowances is £500,000 (though it will reduce to £200,000 from 1 January 2016). Therefore, expenditure incurred before the end of December 2015 will fall in the period with a higher limit eligible for 100% tax relief.
Where expenditure is not covered by the AIA, because the total exceeds it, an annual writing down allowance of 18% is available on a reducing balance basis. This is reduced to 8% for integral features.
The invoice date will determine the date of expenditure, but where equipment is purchased under hire purchase, it will need to be in use to qualify for capital allowances at a particular date.
The same considerations are relevant for other major capital expenditure, for example on an anaerobic digester or biomass boiler. The relevant expenditure will need to be reviewed to identify items that qualify for capital allowances in order to maximise the available tax relief.
Documentation with sufficient detail will need to be obtained from the contractor engaged to ensure that such items can be identified. This will be easier to obtain before completion of the project.
It would be expected that almost all of the cost of a digester or biomass boiler would be eligible for capital allowances. This would include any ground works or concrete pad required to install the plant, as this is essential spending for installation and operation.
As a final consideration, it may be worth setting up a new enterprise in a company so that the cost of a new building can be repaid out of funds that have suffered corporation tax at 20% (to be reduced to 18%), rather than out of funds that have suffered much higher rates of income tax.
This will not work in all situations, but if the new building is part of a standalone enterprise which does not occupy much of the farm, then it may be worth considering, especially where not all the expenditure qualifies for capital allowances.
Peter Griffiths is a director with Cheltenham-based chartered accountants Hazlewoods.